DEPRECIATION - AVOID LAST MOMENT RUSH IN PURCHASING NEW ASSETS- IN VIEW OF FAST APPROACHING 2nd October, 2008

[DEV KUMAR KOTHARI]

Depreciation allowance for use at any time:

Depreciation for assets 'owned' by assessee and 'used' by him in the business can be claimed and allowed if the asset is purchased and used or if it is kept ready for use at any time during the previous year. Therefore, if an asset is purchased and put to use or even if it is kept ready for use as on the last day of the previous year i.e. 31^st March, depreciation can be claimed. However, if the asset is purchased, delivered and claimed to be used on the last day or just few days prior to end of the previous year, a reason of suspicious situation can arise. Similar will be case when full years depreciation is claimed on new assets acquired just on or few days prior to 2^nd October of say 2008.    

Full and half rate depreciation:

Earlier, even in respect of new assets purchased and used any time even on the last date, full year's depreciation was allowable. However, w.e.f. 1.4.1992 the provision was made that in case of any asset acquired by the assessee during the previous year if it is put to use for business or profession for a period of less than 180 days in that previous year the deduction shall be restricted at half of the normal rate. Therefore w.e.f. 1.4.1992 if an asset is purchased and put to use for less than 180 days i.e. prior to 2^nd October (3rd October in case of leap financial year) of the previous year, depreciation at full rate is allowed and if it is purchased after 2^nd October, (3^rd October, in case of leap year) depreciation at ½ of normal rate is allowed.

Last moment rush should be avoided:

It seems that many time depreciable assets are purchased just on the crucial date  (taken generally as 30^th September or 31^st March) or a few days earlier, this naturally creates doubt in the mind of the Assessing Officer.  Unfortunately, in some cases it was noticed that the assets was not put to use on or before the crucial date and therefore, depreciation was not allowable as claimed by the assessee. Under some circumstances, it can also be established by the Assessing Officer that the assessee attempted to claim higher depreciation. This is not good for honest taxpayer. However, by mistake, just considering the date of invoice for the assets purchased may claim higher depreciation. Therefore, care should be taken to find out actual date of starting use of the asset.

Advance planning is required:

It is desirable that the assessee must plan in advance and assets should be purchased, delivered and put to use   well in time after taking into account reasonable time for putting the assets to use before crucial date to claim depreciation allowance.

Specific requirement for use of certain assets:

Some assets can be put to use immediately after unpacking the assets like some furniture, tools, portable equipments etc. However, even in case of some portable equipment, some electrical fittings, cabling, wiring, some installation devices, some furniture and fittings for proper use are required.

In case of some assets, specific permission from concerned authority is required by way of registration, certificate of fitness, authority to use by way of registration or licence etc.  For example- motor vehicle requires registration, some electrical generators require registration for excise duty on electricity, large weighing scale (bridges) requires inspection certificate and registration from concerned authorities. Therefore, in such case necessary licence or registration should be obtained prior to crucial date to establish that the assets was ready for use.

It is always advisable to establish actual use and certification for the same from managers and government authorities wherever required. There should also be circumstantial evidence as to use for example- consumption of raw material, electricity, necessary process materials, production of goods or services rendered etc. 

CIT -vs- Air Travel Enterprise India Ltd. (2004) 136 Taxman 194 (KER):

In this case, the assessee purchased vehicle for carrying person for hire. The purchase was made on 30^th March 1992 and delivery was taken.

Application for a temporary registration was made on the same day and registration was granted on 03.04.1992 w.e.f. 30.03.1992 and it was valid up to 24^th April 1992. This registration entitled the assessee to run vehicle from 30th March 1992. The assessee took the vehicle from Ernakulam to Thiruvanthapuram under this registration.

The assessee also applied on 30^th March 1992 for registration as a non-transport vehicle and the registration was granted on 3^rd April 1992 for the period from 30^th March 1992 to 29^th March 2007.

The assessee operated vehicle from April 1, 1992 for taking tourist party.

However, the vehicle was registered as a contract carriage only on 5^th May 1992.

The Assessing Officer disallowed the claim for depreciation on the ground that the assessee has not used or kept the vehicle ready for use on or before 31^st March 1992; the CIT (A) confirmed the disallowance. However, the Tribunal allowed the claim of the assessee.

It is not clear on what ground and basis the Tribunal allowed depreciation. Most probably it must be on the basis that vehicle was run from 30.03.1992 on the basis of application made for registration and it was run to take the vehicle from Ernakulam To Thiruvanthapuram and put for display for booking tourist party which went on trip on 01.04.1992.

On appeal by the Commissioner, the High Court held that since the contract carriage permit was obtained for vehicle only on 5^th May, 1992 it could not be said legally that the vehicle was kept ready for use as 'contract carriage', on or before 31^st March, 1992 and therefore revising the order of the Tribunal, the High Court held that the assessee was not entitled to get depreciation on the vehicle for the assessment year 1992-93.

The arguments placed before the authorities and Court:

It appears that the Court restricted its consideration on the basis of reasoning for which the AO disallowed the depreciation. This is apparent from the following observations of the Court.

"It is not necessary to refer to the provisions of section 34, for, the only ground on which the Assessing Officer has disallowed depreciation is that the assessee has not used or kept ready for use the vehicle at any time prior to March 31, 1992. So the only question for consideration is as to whether the assessee had used the vehicle or kept ready for use the vehicle on any day during the previous year relevant to the assessment year 1992-93.  Admittedly, the assessee took delivery of the vehicle on March 30, 1992, and the vehicle was taken from Ernakulam to Thiruvananthapuram on the basis of a temporary permit valid up to April 24, 1992. The assessee got registration as a non-transport vehicle on April 3, 1992, with retrospective effect from March 30, 1992.  The assessee had applied for and obtained a contract carriage licence only on May 5, 1992.  The assessee has a case that the vehicle was run on April 1, 1992, for taking a tourist party. As the Assessing Officer himself had noted the expression "used for the purpose of the business" occurring in section 32 will take in vehicle kept ready for use.  So the question is whether it can be said that the vehicle was kept ready for use on March 30, 1992, or March 31, 1992, when the regular contract carriage licence was issued only on May 5, 1992."

From the order of the High Court, it is not clear on what basis the tribunal allowed depreciation. However, considering the provision only the finding of tribunal ought to be the vehicle was used before 31^st March 1992.  The Court has given weight-age to the point that the vehicle was registered as carriage vehicle only on 5^th May 1992. However, in view of the author, the following uses are also to be considered:

1) Carrying vehicle from the vendor's show room to the place of the assessee. This is usually on a temporary permit and   some time only on a dealer's licence and insurance. Therefore, the fact that the vehicle was taken from Ernakulam to Thiruvananthapuram is a necessary factor so as to establish the use of vehicle on 30^th and 31^st March.

2) The assessee took a tourist party of 13 persons on 1^st April 1992.  Therefore, it is evident that on 30^th and 31^st March, 1992 the assessee has shown the vehicle to prospective customers for taking a trip and made out a tour party for the purpose of booking. Therefore, it could be said that the vehicle having been shown to customer on 30^th and / or 31^st March or even giving assurance that the vehicle is on the way from Ernakulam and it will be available on 1^st April, it can be said that the vehicle was used on 30^th and 31^st March.

3) The main intention and business of the assessee might be to use the vehicle for contract carriage but it is also recorded the fact that the vehicle was registered w.e.f. 30^th March 1992 entitling the assessee to run the vehicle.  

4) In practice it is found that for few days vehicle may run even on dealers licence after submission of application and inspection of the vehicle, the owner takes the vehicle to his place. Therefore, running of vehicle from the show room to the registering authority for inspection and then to the owner's place and running the vehicle on dealers registration also amounts to use of the vehicle for the purpose of business.

5) In this case these arguments were not placed and from the reading of question, it appears that the assessee had admitted   that the vehicle was run only on 1^st April 1992 - the High Court disallowed the depreciation.  However, it appears that the assessee's admission was only in respect of running of vehicle from 1^st April, 1992 for booking tourist party with 13 passengers for which the arrangement had been made before that date.

6) Therefore it seems that in view of certificate of registration granted on 03.04.1992 with retrospective effect from 30.03.1992 the assets was capable of being used after making application and particularly when the assessee obtained facility of dealers license to run the vehicle as temporary registration which permitted the assessee to run the vehicle from Ernakulam to Thiruvananthapuram, it can be said that the vehicle was used on 30^th and 31^st March, as a general vehicle and therefore the assessee was entitled to depreciation applicable to a general vehicle and not as a contract carriage vehicle.

CONCLUSION:

In view of the above discussion it is always advisable that any assets should be timely purchased, steps should be taken for the purpose of putting the assets to its proper and main business use well in advance. Necessary permission and licenses from the Govt. authorities must be obtained well before the crucial date.

Now 3^rd October is approaching fast, therefore, if full years depreciation is intended to be claimed on any asset to be purchased, immediate steps should be taken to place order, purchase, take delivery, obtain necessary permits/ licenses if required, or install and put to use the asset well before the crucial date of 3^rd October, to avoid doubtful situations.

In case of assets which require some other accessories, attachments, supporting equipments and other paraphernalia to put to use, it must be ensured that all such items are also installed before the crucial date, otherwise an intelligent A.O. (particularly who is  a technocrat, engineer or have strong commonsense- which most of them have when a matter to disallow a claim comes) , can make enquiry and establish lack of necessary circumstances in which an asset can be put to use.